CEO Problems Show Why Chesapeake Is a Bad Bet
NEW YORK (TheStreet) -- Chesapeake Energy
Founder, CEO and current Chairman Aubrey McClendon has come under fire as it was revealed he has racked up personal loans of up to $1.1 billion, secured by his stakes in thousands of wells Chesapeake has drilled under their very unique "Founders Well Participation Program." This program allowed McClendon to invest and own 2.5% of every well Chesapeake drills. With natural gas prices dropping and leverage increasing from breakneck drilling at the company over the past several years, McClendon has been forced to secure loans to pay for the development costs for his share of the wells -- but no one on the board apparently knew just how extensive these loans had become. The questions surrounding these loans and the possible conflict of interest for the CEO have brought the IRS and SEC sniffing around the company and have sent shares reeling in recent weeks.
|A program at Chesapeake Energy means every well Chesapeake drills can be invested in and 2.5% owned by founder, CEO and current Chairman Aubrey McClendon.|
In response to the obvious loss of shareholder confidence, Chesapeake also announced it will end the FWPP early, although not until 2014. But questions remain and will remain about the program: Will McClendon be allowed to continue to invest for the next two years? And what about the huge stakes the CEO already owns? Will the board request or demand that McClendon divest himself of those stakes? It seems unlikely any real restraints will be put on the Chesapeake leader, and much of these moves are just window dressing in front of a quarterly report today that looks likely to disappoint.
Neither the end of the FWPP, no matter the timing, nor the appointment of a new chairman -- Eric Rosenbaum of thestreet.com has slyly recommended ex-Exxon Mobil
Don't get me wrong. If natural gas magically moves back from just over $2/mcf to trade above $5, Chesapeake will be just fine, McClendon's loans will disappear and the CEO will go from being hundreds of millions in debt to being a very wealthy billionaire. But what should you care as an investor? Why should you bet on this rogue of a CEO and his company instead of finding a natural gas company you can believe in -- one that will rocket and triple a lot quicker than Chesapeake if natural gas makes that magical double of price?
You shouldn't -- look at some real natural gas companies to bet on the future of U.S. energy: EnCana